This is the real reason Russia wants to talk to Saudi Arabia about oil

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The price of oil is jumping for a third consecutive day on Monday after some reassurance for the markets that oil’s biggest players are working to try to stabilize the world’s most important commodity.

Oil spiked by more than 1% earlier in the day following news out of Russia that the country is in talks with Saudi Arabia about the state of the oil industry.

Since then both major oil benchmarks have continued to climb and at 3:50 p.m. BST (10:50 a.m. ET) Brent crude, the international benchmark, is higher by 2.26% to $48.03 a barrel and US West Texas Intermediate crude is up 2.47% to trade at $45.59.

The rise is largely down to comments from Russian oil minister Alexander Novak — often cited as the most important man in the oil industry — that Russia and Saudi Arabia were working together to create “market stability.”

Reuters quoted Novak as having given an interview with the Saudi newspaper Asharq al-Awsat in which he said (emphasis ours):

“With regard to the cooperation with Saudi Arabia, the dialogue between our two countries is developing in a tangible way, whether in the framework of a multi-party structure or on a bilateral level.

“We are cooperating in the framework of consultations regarding the oil market with OPEC countries and producers from outside the organisation, and are determined to continue dialogue to achieve market stability.

“We are ready to achieve the widest possible level of coordination … and put in place joint measures to achieve oil market stability, with the condition that these measures will not be for a limited period of time.”

Russia and Saudi Arabia are probably the two most important oil producers on the planet, with Saudi Arabia the de facto leader of the OPEC cartel of oil-producing nations. Russia, alongside the USA, is one of the two biggest non-OPEC producers. What the two nations do regarding oil policy has profound effects on the markets. For example, at April’s massively anticipated OPEC meeting about a freeze in production, Saudi Arabia refused to cooperate unless Iran joined in any production freeze, and, as a result the meeting ended up as a damp squib.

With the two nations starting to work together, hopes for a solution to the massive glut in the oil industry are rising. That glut has sent prices tumbling in recent weeks, with the commodity back into a bear market, down 20% from its recent high in June. Here is how that looks:

However, while Novak argues that the reason for the talks with Saudi Arabia is wanting to create “market stability”, it seems likely that the real reason has something to do with Rosneft, Russia’s state-owned oil company. Novak’s comments came only hours before Rosneft, reported a massive fall in profits for the second quarter of 2016, with net income down from 134 billion roubles (£1.62 billion) over the same period in 2015 to 89 billion roubles (£1.08 billion).

If Russia can strike an agreement with Saudi Arabia that can help boost oil prices, or at least keep them stable, that will likely allow Rosneft return to stronger profitablity.

Rosneft’s results come just three days after a report from the highly respected International Energy Agency argued that the supply-and-demand imbalance plaguing oil was only going to get worse in 2017, something that would further depress prices.

The latest oil-market update from the IEA predicted that global demand for oil in 2017 would decrease at a greater rate than first thought, slowing to 1.2 million barrels a day from the 1.3 million previously expected. The prognosis is a result of what the agency calls a “dimmer macroeconomic outlook.”

It should be noted that along with Novak’s comments oil markets are also most likely still reacting to the news that the Baker Hughes rig count, which shows how many active oilrigs there are in the US, increased for a seventh consecutive week.